["Business Ethics, the Environment &Responsibility, EarlyView. ", "\nABSTRACT\nEnvironmental, social, and governance (ESG) performance serves not only as a response to urgent climate risks but also as a strategic tool for sustainable value creation. However, the rise in greenwashing suggests gaps in existing governance frameworks. This study examines the Fair Competition Review System (FCRS), a policy aimed at mitigating administrative monopolies by emphasizing market mechanisms. Unlike prior research that focuses primarily on firm‐level factors or macroeconomic interventions, this study situates FCRS within the framework of new institutional economics, constructing a causal chain from institutional pressures to corporate responses. Empirical results demonstrate that the FCRS significantly drives ESG behavior. Mechanism analysis identifies three key pathways: stimulation of green innovation, reduction of financing costs, and optimization of income distribution, each grounded in reduced institutional transaction costs. Further analysis underscores the importance of synergistic governance and highlights several factors that enhance policy effectiveness, including equity incentive systems, audit committees, regional rule‐of‐law environments, and digital infrastructure. A particularly novel finding is that identical external institutional pressures can lead to both substantive ESG implementation and strategic brownwashing, a phenomenon previously underexplored. This study extends the scope of institutional economics and refines the framework for understanding ESG performance drivers. Practically, it offers policymakers and enterprise leaders a roadmap for leveraging institutional pressures to achieve sustainable competitive advantages.\n"]